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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                 
Commission File No. 001-38464
 
Smartsheet Inc.
(Exact name of Registrant as specified in its charter)
 
Washington
 
20-2954357
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
 
10500 NE 8th Street, Suite 1300
 
 
Bellevue,
WA
 
98004
(Address of principal executive offices)
 
(Zip Code)

 
(844)
 324-2360
 
 
Registrant’s telephone number, including area code
 
 
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A common stock, no par value per share
SMAR
The New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit). Yes    No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No 
As of August 31, 2019, there were 90,933,466 shares of the registrant’s Class A common stock and 25,641,106 shares of the registrant’s Class B common stock outstanding.


Table of Contents

SMARTSHEET INC.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended July 31, 2019

Table of Contents
Page
 
 


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements contained in this Quarterly Report on form 10-Q other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth and trends, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “potentially,” “likely,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, operating results, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described under Part II, Item 1A, “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this Quarterly Report on Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely on forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or may not occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or events and circumstances reflected in the forward-looking statements will be achieved or will occur. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q or to conform these statements to actual results or revised expectations.


Table of Contents

Part I. Financial Information
Item 1. Financial Statements
SMARTSHEET INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2019
 
2018
 
2019
 
2018
Revenue
 
 
 
 
 
 
 
Subscription
$
58,315

 
$
37,470

 
$
108,636

 
$
69,528

Professional services
6,329

 
4,914

 
12,202

 
9,175

Total revenue
64,644

 
42,384

 
120,838

 
78,703

Cost of revenue
 
 
 
 


 
 
Subscription
7,982

 
4,588

 
14,183

 
8,824

Professional services
4,683

 
3,567

 
8,967

 
6,654

Total cost of revenue
12,665

 
8,155

 
23,150

 
15,478

Gross profit
51,979

 
34,229

 
97,688

 
63,225

Operating expenses
 
 
 
 

 
 
Research and development
22,210

 
14,412

 
42,448

 
27,257

Sales and marketing
39,260

 
24,255

 
74,673

 
46,639

General and administrative
11,457

 
8,524

 
22,397

 
15,322

Total operating expenses
72,927

 
47,191

 
139,518

 
89,218

Loss from operations
(20,948
)
 
(12,962
)
 
(41,830
)
 
(25,993
)
Interest income
2,114

 
908

 
3,263

 
1,076

Other income (expense), net
(319
)
 
(159
)
 
(431
)
 
(1,626
)
Net loss before income tax provision (benefit)
(19,153
)
 
(12,213
)
 
(38,998
)
 
(26,543
)
Income tax provision (benefit)
(39
)
 
88

 
(74
)
 
88

Net loss and comprehensive loss
$
(19,114
)
 
$
(12,301
)
 
$
(38,924
)
 
$
(26,631
)
Net loss per share attributable to common shareholders, basic and diluted
$
(0.17
)
 
$
(0.12
)
 
$
(0.36
)
 
$
(0.43
)
Weighted-average shares outstanding used to compute net loss per share attributable to common shareholders, basic and diluted
111,557

 
102,569

 
108,626

 
62,464

See notes to condensed consolidated financial statements.

4

Table of Contents

SMARTSHEET INC.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
 
July 31, 2019
 
January 31, 2019
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
511,214

 
$
213,085

Short-term investments
50,000

 

Accounts receivable, net of allowances of $1,571 and $1,234, respectively
40,178

 
30,173

Prepaid expenses and other current assets
9,914

 
3,922

Total current assets
611,306

 
247,180

Long-term assets
 
 
 
Restricted cash
886

 
2,620

Deferred commissions
35,615

 
29,014

Property and equipment, net
25,906

 
22,540

Operating lease right-of-use assets
49,719

 

Intangible assets, net
16,857

 
1,827

Goodwill
16,677

 
5,496

Other long-term assets
265

 
67

Total assets
$
757,231

 
$
308,744

Liabilities, preferred stock, and shareholders’ equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
2,546

 
$
4,658

Accrued compensation and related benefits
25,416

 
25,557

Other accrued liabilities
10,395

 
6,544

Operating lease liabilities, current
9,530

 

Finance lease liabilities, current
3,277

 
3,768

Deferred revenue
123,529

 
95,766

Total current liabilities
174,693

 
136,293

Operating lease liabilities, non-current
42,964

 

Finance lease liabilities, non-current
2,295

 
2,164

Deferred revenue, non-current
338

 
367

Other long-term liabilities

 
2,928

Total liabilities
220,290

 
141,752

Commitments and contingencies (Note 12)

 

Shareholders’ equity
 
 
 
Preferred stock, no par value; 10,000,000 shares authorized, no shares issued or outstanding as of July 31, 2019 and January 31, 2019

 

Class A common stock, no par value; 500,000,000 shares authorized, 90,311,498 shares issued and outstanding as of July 31, 2019; 500,000,000 shares authorized, 48,003,701 shares issued and outstanding as of January 31, 2019

 

Class B common stock, no par value; 500,000,000 shares authorized, 26,036,134 shares issued and outstanding as of July 31, 2019; 500,000,000 shares authorized, 56,967,742 shares issued and outstanding as of January 31, 2019

 

Additional paid-in capital
736,383

 
327,510

Accumulated deficit
(199,442
)
 
(160,518
)
Total shareholders’ equity
536,941

 
166,992

Total liabilities, preferred stock, and shareholders’ equity
$
757,231

 
$
308,744

See notes to condensed consolidated financial statements.

5

Table of Contents

SMARTSHEET INC.
Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Shareholders’ Equity (Deficit)
(dollars in thousands)
(unaudited)
 
Convertible Preferred Stock
 
 
Common Stock (Class A and B)
 
Additional Paid-in
Capital
 
Accumulated Deficit
 
Accumulated
Other Comprehensive Income
 
Total Shareholders’ Equity (Deficit)
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
 
Balances at January 31, 2019

 
$

 
 
104,971,443

 
$

 
$
327,510

 
$
(160,518
)
 
$

 
$
166,992

Issuance of common stock under employee stock plans

 

 
 
2,351,189

 

 
14,102

 

 

 
14,102

Issuance of common stock in connection with follow-on public offering, net of underwriting discounts, commissions, and issuance costs

 

 
 
9,025,000

 

 
378,970

 

 

 
378,970

Share-based compensation expense

 

 
 

 

 
15,801

 

 

 
15,801

Comprehensive loss

 

 
 

 

 

 
(38,924
)
 

 
(38,924
)
Balances at July 31, 2019

 
$

 
 
116,347,632

 
$

 
$
736,383

 
$
(199,442
)
 
$

 
$
536,941


 
Convertible Preferred Stock
 
 
Common Stock (Class A and B)
 
Additional Paid-in
Capital
 
Accumulated Deficit
 
Accumulated
Other Comprehensive Income
 
Total Shareholders’ Equity (Deficit)
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
 
Balances at January 31, 2018
67,619,377

 
$
112,687

 
 
20,280,741

 
$

 
$
25,892

 
$
(106,633
)
 
$

 
$
(80,741
)
Issuance of common stock under employee stock plans

 

 
 
2,012,831

 

 
2,161

 

 

 
2,161

Issuance of common stock upon net exercise of warrant

 

 
 
134,603

 

 
2,598

 

 

 
2,598

Issuance of common stock in connection with initial public offering, net of underwriting discounts, commissions, and issuance costs

 

 
 
11,745,088

 

 
160,413

 

 

 
160,413

Conversion of convertible preferred stock to common stock in connection with initial public offering
(67,619,377
)
 
(112,687
)
 
 
68,479,732

 

 
112,687

 

 

 
112,687

Share-based compensation expense

 

 
 

 

 
5,940

 

 

 
5,940

Comprehensive loss

 

 
 

 

 

 
(26,631
)
 

 
(26,631
)
Balances at July 31, 2018

 
$

 
 
102,652,995

 
$

 
$
309,691

 
$
(133,264
)
 
$

 
$
176,427


See notes to condensed consolidated financial statements.


6

Table of Contents

SMARTSHEET INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
Six Months Ended July 31,
 
2019
 
2018
Cash flows from operating activities
 
 
 
Net loss
$
(38,924
)
 
$
(26,631
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Share-based compensation expense
15,383

 
5,940

Remeasurement of convertible preferred stock warrant liability

 
1,326

Depreciation of property and equipment
5,022

 
3,173

Amortization of deferred commission costs
8,423

 
4,452

Unrealized foreign currency loss
286

 
66

Amortization of intangible assets
1,060

 
255

Amortization of operating lease right-of-use assets
3,668

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(9,310
)
 
(8,747
)
Prepaid expenses and other current assets
(6,324
)
 
(1,767
)
Other long-term assets
(198
)
 
50

Accounts payable
(2,099
)
 
597

Other accrued liabilities
3,970

 
1,825

Accrued compensation and related benefits
(701
)
 
1,070

Deferred commissions
(15,024
)
 
(9,882
)
Other long-term liabilities
(1,003
)
 
124

Deferred revenue
26,704

 
18,876

Operating lease liabilities
(2,810
)
 

Net cash used in operating activities
(11,877
)
 
(9,273
)
Cash flows from investing activities
 
 
 
Purchases of short-term investments
(50,000
)
 

Purchases of property and equipment
(3,085
)
 
(2,214
)
Capitalized internal-use software development costs
(3,397
)
 
(849
)
Payments for business acquisition, net of cash acquired
(26,839
)
 

Net cash used in investing activities
(83,321
)
 
(3,063
)
Cash flows from financing activities
 
 
 
Proceeds from initial public offering of common stock, net of underwriters' discounts and commissions

 
163,844

Proceeds from follow-on offering of common stock, net of underwriters' discounts and commissions
379,828

 

Payments of principal on finance leases
(2,042
)
 
(1,584
)
Payments of deferred offerings costs
(706
)
 
(2,263
)
Proceeds from exercise of stock options
9,738

 
2,614

Proceeds from Employee Stock Purchase Plan
4,991

 
2,118

Net cash provided by financing activities
391,809

 
164,729

Effects of changes in foreign currency exchange rates on cash, cash equivalents, and restricted cash
(216
)
 
(44
)
Net increase in cash, cash equivalents, and restricted cash
296,395

 
152,349

Cash, cash equivalents, and restricted cash
 
 
 
Beginning of period
215,705

 
61,059

End of period
$
512,100

 
$
213,408


7

Table of Contents

Supplemental disclosures





Cash paid for interest
$
118


$
161

Purchases of fixed assets under finance leases
1,682


2,639

Accrued purchases of property and equipment (including internal-use software)
906


362

Deferred offering costs, accrued but not yet paid
164


340

Share-based compensation expense capitalized in internal-use software development costs
421




See notes to condensed consolidated financial statements.

8

Table of Contents

SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Overview and Basis of Presentation
Description of business
Smartsheet Inc. (the “Company,” “we,” “our”) was incorporated in the State of Washington in 2005, and is headquartered in Bellevue, Washington. The Company is a leading cloud-based platform for work execution, enabling teams and organizations to plan, capture, manage, automate, and report on work at scale. Customers access their accounts online via a web-based interface or a mobile application. Some customers also purchase the Companys professional services, which primarily consist of consulting and training services.
Follow-on offering
On June 14, 2019, we completed a public equity offering in which we issued and sold 9,025,000 shares of Class A common stock, inclusive of the exercised over-allotment option, at a public offering price of $43.50 per share. In addition, 5,810,000 shares of the Company’s common stock were sold by selling shareholders of the Company, inclusive of the over-allotment, as part of this offering. We received net proceeds of $379.0 million after deducting underwriting discounts and commissions of $12.8 million and other issuance costs of $0.9 million. We did not receive any proceeds from the sale of common stock by selling shareholders.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The condensed consolidated balance sheet as of January 31, 2019 was derived from the audited consolidated financial statements as of that date but does not include all of the information and notes required by GAAP for complete financial statements. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Therefore, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended January 31, 2019, filed with the SEC on April 1, 2019.
The condensed consolidated financial statements include the results of Smartsheet Inc. and its wholly owned subsidiaries, which are located in the United States and the United Kingdom. All intercompany balances and transactions have been eliminated upon consolidation.
In the opinion of management, the information contained herein reflects all adjustments necessary for a fair presentation of our condensed consolidated financial statements. All such adjustments are of a normal, recurring nature. The results of operations for the three and six months ended July 31, 2019 are not necessarily indicative of results to be expected for the full year ending January 31, 2020 or for any other interim period, or for any future year.
Use of estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. The Company bases its estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances. Actual results could differ from those estimates. The Company’s most significant estimates and judgments involve revenue recognition with respect to the allocation of transaction consideration for the Company’s offerings; determination of the amortization period for capitalized sales commission costs; capitalization of internal-use software development costs; valuation of assets and liabilities acquired as part of business combinations; and incremental borrowing rate estimates for operating leases, among others.

9

Table of Contents
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


2. Summary of Significant Accounting Policies
Segment information
The Company operates as one operating segment. The Company’s chief operating decision maker is its Chief Executive Officer, who reviews financial information for purposes of making operating decisions, assessing financial performance, and allocating resources.
Restricted cash
Restricted cash as of July 31, 2019 consisted of $0.9 million primarily related to security deposits for the Company’s Bellevue, Boston, London, and Edinburgh leases.
Restricted cash as of January 31, 2019 consisted of $1.8 million related to collateral for irrevocable letters of credit and $0.8 million related to security deposits. The amount of letters of credit that were outstanding as of January 31, 2019 were still in effect as of July 31, 2019, however they are now on an unsecured basis and as such the collateral was released.
Cash as reported on the condensed consolidated statements of cash flows includes the aggregate amounts of cash and cash equivalents and restricted cash as shown on the condensed consolidated balance sheets. Cash as reported on the condensed consolidated statements of cash flows consists of the following (in thousands):
 
July 31,
 
2019
 
2018
Cash and cash equivalents
$
511,214

 
$
211,111

Restricted cash
886

 
2,297

Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows
$
512,100

 
$
213,408


Internal-use software development costs
The Company capitalizes certain qualifying costs incurred during the application development stage in connection with the development of internal-use software. Costs related to preliminary project activities and post-implementation activities are expensed in research and development (“R&D”) as incurred. R&D expenses consist primarily of employee-related costs, hardware- and software-related costs, costs of outside services used to supplement our internal staff, and overhead allocations.
Internal-use software costs of $2.2 million were capitalized in the three months ended July 31, 2019, of which $1.4 million related to costs incurred during the application development stage of software development for the Company’s platform to which subscriptions are sold. Internal-use software costs of $0.6 million were capitalized in the three months ended July 31, 2018, none of which related to costs incurred during the application development stage of software development for the Company’s platform to which subscriptions are sold.
Internal-use software costs of $3.8 million were capitalized in the six months ended July 31, 2019, of which $2.4 million related to costs incurred during the application development stage of software development for the Company’s platform to which subscriptions are sold. Internal-use software costs of $0.8 million were capitalized in the six months ended July 31, 2018, none of which related to costs incurred during the application development stage of software development for the Company’s platform to which subscriptions are sold.
Capitalized software development costs are included within property and equipment, net on the condensed consolidated balance sheets, and are amortized over the estimated useful life of the software, which is typically three years. The related amortization expense is recognized in the condensed consolidated statements of comprehensive loss within the function that receives the benefit of the developed software. Amortization expense of capitalized internal-use software costs totaled $0.5 million and $0.2 million for the three months ended July 31, 2019 and 2018, respectively, and $0.9 million and $0.4 million for the six months ended July 31, 2019 and 2018, respectively. The

10

Table of Contents
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Company evaluates the useful lives of these assets and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
Leases
We determine if an arrangement is a lease at inception, and leases are classified at commencement as either operating or finance leases.
Right-of-use (“ROU”) assets and lease liabilities are recognized at commencement date based on the present value of the future minimum lease payments over the lease term. Operating lease ROU assets are presented separately in long-term assets and finance lease ROU assets are included in property and equipment, net on the condensed consolidated balance sheets. As most of our operating leases do not provide an implicit rate, we use our incremental borrowing rate in determining the present value of future payments. This rate is an estimate of the collateralized borrowing rate we would incur on our future lease payments over a similar term based on the information available at commencement date. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. At July 31, 2019 we did not include any options to extend leases in our lease terms as we were not reasonably certain to exercise them.
We utilize certain practical expedients and policy elections available under the lease accounting standard. For example, we do not record right-of-use assets or lease liabilities for leases with terms of 12 months or less, and we combine lease and non-lease components for contracts containing real estate leases.
Right-of-use assets are subject to evaluation for impairment or disposal on a basis consistent with other long-lived assets.
Concentrations of risk and significant customers
Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash, cash equivalents, short-term investments, and accounts receivable. The Company maintains its cash accounts with financial institutions where deposits, at times, exceed the Federal Deposit Insurance Corporation (“FDIC”) limits.
No individual customers represented more than 10% of accounts receivable as of July 31, 2019 or January 31, 2019. No individual customers represented more than 10% of revenue for the three or the six months ended July 31, 2019 or 2018.
Recently adopted accounting pronouncements
We adopted Accounting Standard Update (“ASU”) 2016-02, Leases - Topic 842 (“ASC 842”) on February 1, 2019 using the optional transition method described in ASU 2018-11, Leases - Targeted Improvements. Under the optional transition method, we recognized the cumulative effect of initially applying the guidance as an adjustment to the operating lease right-of-use assets and operating lease liabilities on our condensed consolidated balance sheet on February 1, 2019 without retrospective application to comparative periods.
The new lease standard requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for operating leases, and also requires additional quantitative and qualitative disclosures to enable users of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. In adopting ASC 842, we utilized certain practical expedients available under the standard. These practical expedients include waiving reassessment of conclusions reached under the previous lease standard as to whether contracts contain leases and not recording right-of-use assets or lease liabilities for leases with terms of 12 months or less.
As a result of implementing this guidance, we recognized a $53.4 million net operating ROU asset and a $55.3 million operating lease liability, inclusive of $1.9 million previously classified as deferred rent, in our condensed consolidated balance sheet as of February 1, 2019. The adoption of ASC 842 did not have an impact on our accumulated deficit on our condensed consolidated balance sheet as of February 1, 2019 and is not expected to have a material impact on our condensed consolidated statements of operations or comprehensive loss.

11

Table of Contents
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


See Note 11, Leases, of the accompanying notes to the condensed consolidated financial statements for additional information regarding our leases.
Recent accounting pronouncements not yet adopted
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other-Internal-Use Software (“ASU 2018-15”), which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company does not expect that this ASU will have a material impact on its condensed consolidated financial statements.
3. Revenue from Contracts with Customers
During the three months ended July 31, 2019 and 2018, the Company recognized $45.3 million and $27.8 million of subscription revenue, respectively, and $1.9 million and $1.3 million of professional services revenue, respectively, which were included in the deferred revenue balance as of April 30, 2019 and 2018, respectively.
During the six months ended July 31, 2019 and 2018, the Company recognized $68.5 million and $41.2 million of subscription revenue, respectively, and $1.9 million and $1.0 million of professional services revenue, respectively, which were included in the deferred revenue balance as of January 31, 2019 and 2018, respectively.
As of July 31, 2019 approximately $129.4 million of revenue, including amounts already invoiced and amounts contracted but not yet invoiced, was expected to be recognized from remaining performance obligations, of which $126.4 million related to subscription services and $2.9 million related to professional services. Approximately 98% of revenue related to remaining performance obligations is expected to be recognized in the next 12 months.
4. Deferred Commissions
Deferred commissions were $35.6 million as of July 31, 2019 and $29.0 million as of January 31, 2019.
Amortization expense for deferred commissions was $4.6 million and $2.5 million for the three months ended July 31, 2019 and 2018, respectively, and $8.4 million and $4.5 million for the six months ended July 31, 2019 and 2018, respectively. Deferred commissions are amortized over a period of three years and the amortization expense is recorded in sales and marketing on the Company’s condensed consolidated statements of operations.
5. Net Loss Per Share
The following tables present calculations for basic and diluted net loss per share (in thousands, except share and per share data):
 
Three Months Ended July 31,
 
2019
 
2018
Numerator:
 
 
 
Net loss
$
(19,114
)
 
$
(12,301
)
Denominator:
 
 
 
Weighted-average common shares outstanding
111,557

 
102,569

Net loss per share, basic and diluted
$
(0.17
)
 
$
(0.12
)

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Table of Contents
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


 
Six Months Ended July 31,
 
2019
 
2018
Numerator:
 
 
 
Net loss
$
(38,924
)
 
$
(26,631
)
Denominator:
 
 
 
Weighted-average common shares outstanding
108,626

 
62,464

Net loss per share, basic and diluted
$
(0.36
)
 
$
(0.43
)
The following outstanding shares of common stock equivalents (in thousands) as of the periods presented were excluded from the computation of diluted net loss per share attributable to common shareholders for the periods presented because the impact of including them would have been anti-dilutive:
 
July 31,
2019
 
2018
Shares subject to outstanding common stock awards
13,348

 
15,466

Shares issuable pursuant to the 2018 Employee Stock Purchase Plan
116

 
166

Total potentially dilutive shares
13,464

 
15,632


6. Fair Value Measurements
Assets and liabilities recorded at fair value in the condensed consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The lowest level of significant input determines the placement of the fair value measurement within the following hierarchical levels:
Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs that are supported by little or no market activity.
The following tables present information about the Company’s financial assets and liabilities that are measured at fair value and indicate the fair value hierarchy of the valuation inputs used (in thousands):
 
July 31, 2019
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
   Money market funds
$
289,361

 
$

 
$

 
$
289,361

   Certificates of deposit

 
100,000

 

 
100,000

Short-term investments:
 
 
 
 
 
 
 
Certificates of deposit

 
50,000

 

 
50,000

Total assets
$
289,361

 
$
150,000

 
$

 
$
439,361


13

Table of Contents
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


 
January 31, 2019
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
   Money market funds
$
203,746

 
$

 
$

 
$
203,746

Restricted cash:
 
 
 
 
 
 
 
   Certificates of deposit

 
1,775

 

 
1,775

Total assets
$
203,746

 
$
1,775

 
$

 
$
205,521


The carrying amounts of certain financial instruments, including cash held in banks, accounts receivable, and accounts payable, approximate fair value due to their short-term maturities and are excluded from the fair value tables above.
It is the Company’s policy to recognize transfers of assets and liabilities between levels of the fair value hierarchy at the end of a reporting period. The Company does not transfer out of Level 3 and into Level 2 until observable inputs become available and reliable.
7. Business Combinations
On May 1, 2019, we acquired 100% of the outstanding equity of Artefact Product Group, LLC (“Artefact Product Group” or “10,000ft”), a Washington limited liability company, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”). The acquisition is complementary to our existing product capabilities and accelerates our time to market for a resource planning software solution. The aggregate consideration payable in exchange for all of the outstanding equity interests of Artefact Product Group was approximately $28.0 million in cash, excluding cash acquired and transaction cost adjustments. Of the cash paid at closing, $3.0 million is held in escrow for a 12-month period after closing to secure our indemnification rights under the Merger Agreement.
We accounted for the transaction as a business combination using the acquisition method of accounting. We allocated the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values on the acquisition date. Excess purchase price consideration was recorded as goodwill, and is primarily attributable to the acquired assembled workforce and expected growth from the expansion of the acquired product offerings and customer base. The goodwill recognized upon acquisition is expected to be deductible for U.S. federal income tax purposes.
We engaged a third-party valuation specialist to aid our analysis of the fair value of the acquired intangibles. All estimates, key assumptions, and forecasts were either provided by or reviewed by us. While we chose to utilize a third-party valuation specialist for assistance, the fair value analysis and related valuations reflect the conclusions of management and not those of any third party.
10,000ft’s results of operations have been included in the Company’s condensed consolidated results of operations since the acquisition date. The purchase price allocation as of the acquisition date was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available.

14

Table of Contents
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


The major classes of assets and liabilities to which the Company preliminarily allocated the purchase price were as follows (in thousands):
 
May 1, 2019
Cash
$
1,150

Current Assets
801

Intangible Assets
16,090

Goodwill
11,181

Current Liabilities
(180
)
Deferred Revenue
(1,030
)
Total
$
28,012


The estimated useful lives and fair values of the identifiable intangible assets at acquisition date were as follows (dollars in thousands):
 
Fair Value
 
Expected Useful Life
Software Technology
$
8,000

 
5 years
Customer Relationships
7,990

 
8 years
Trade Name
100

 
32 months
Total intangible assets
$
16,090

 
 


Fiscal 2019 Acquisition
On January 11, 2019, Smartsheet Inc. purchased 100% of the issued and outstanding capital stock of TernPro, Inc. in an all-cash transaction for a total purchase price of $6.0 million. As a result of this acquisition, the Company recorded goodwill of $5.2 million; identifiable intangible assets of $0.8 million, of which $0.5 million related to acquired software technology, and $0.3 million related to customer relationships; and other net assets of less than $0.1 million. In addition, the Company recorded a long-term liability of $1.0 million related to a holdback payable on the 18-month anniversary of the closing date. As of July 31, 2019, the liability of $1.0 million is classified as short-term, and is included within other accrued liabilities on the condensed consolidated balance sheet.
8. Goodwill and Net Intangible Assets
The changes in the carrying amount of goodwill during the six months ended July 31, 2019 were as follows (in thousands):
Goodwill balance as of January 31, 2019
$
5,496

Addition - acquisition of 10,000ft
11,181

Goodwill balance as of July 31, 2019
$
16,677



15

Table of Contents
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following table presents the components of net intangible assets (in thousands):
 
As of July 31, 2019
 
As of January 31, 2019
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Acquired software technology
$
9,866

 
$
(1,214
)
 
$
8,652

 
$
1,866

 
$
(494
)
 
$
1,372

Acquired customer relationships
8,350

 
(341
)
 
8,009

 
360

 
(25
)
 
335

Trade names
100

 
(9
)
 
91

 

 

 

Patents
170

 
(78
)
 
92

 
170

 
(63
)
 
107

Domain name
13

 

 
13

 
13

 

 
13

Total
$
18,499

 
$
(1,642
)
 
$
16,857

 
$
2,409

 
$
(582
)
 
$
1,827

The components of intangible assets acquired as of the periods presented were as follows (in thousands):
 
As of July 31, 2019
 
As of January 31, 2019
 
Net Carrying Amount
 
Weighted Average Life (Years)
 
Net Carrying Amount
 
Weighted Average Life (Years)
Acquired software technology
$
8,652

 
4.39
 
$
1,372

 
2.31

Acquired customer relationships
8,009

 
7.57
 
335

 
2.86

Trade names
91

 
2.42
 

 

Total
$
16,752

 
5.90
 
$
1,707

 
2.42


Amortization expense related to intangible assets was $0.9 million and $0.1 million for the three months ended July 31, 2019 and 2018, respectively, and $1.1 million and $0.3 million for the six months ended July 31, 2019 and 2018, respectively.
As of July 31, 2019, estimated remaining amortization expense for the finite-lived intangible assets by fiscal year is as follows (in thousands):
Remainder of fiscal 2020
 
$
1,702

Fiscal 2021
 
3,358

Fiscal 2022
 
2,897

Fiscal 2023
 
2,608

Fiscal 2024
 
2,607

Thereafter
 
3,672

Total
 
$
16,844


9. Share-Based Compensation
The Company has issued incentive and non-qualifying stock options to employees and non-employee directors under the 2005 Stock Option/Restricted Stock Plan (the “2005 Plan”), the 2015 Equity Incentive Plan (the “2015 Plan”), and the 2018 Equity Incentive Plan (the “2018 Plan”).
The Company has also issued restricted stock units (“RSUs”) to employees and non-employee directors pursuant to the 2015 Plan and the 2018 Plan.
Stock options are granted with exercise prices at the fair value of the underlying common stock on the grant date, in general vest based on continuous employment over four years, and expire 10 years from the date of grant. RSUs are measured based on the grant date fair value of the awards and in general vest based on continuous employment over four years.
2018 Employee Stock Purchase Plan
In April 2018, we adopted our 2018 Employee Stock Purchase Plan (“ESPP”). The ESPP became effective on April 26, 2018, with the effective date of our initial public offering.
Under our ESPP, eligible employees are able to acquire shares of our Class A common stock by accumulating funds through payroll deductions of up to 15% of their compensation, subject to plan limitations. Purchases are accomplished through participation in discrete offering periods. Each offering period is six months (commencing each March 25 and September 25) and consists of one six-month purchase period, unless otherwise determined by our board of directors or our compensation committee. The purchase price for shares of our common stock purchased under our ESPP is 85% of the lesser of the fair market value of our common stock on (i) the first trading day of the applicable offering period or (ii) the last trading day of the purchase period in the applicable offering period.
The aggregate number of shares reserved for sale under our ESPP will increase automatically on February 1 of each of the first 10 calendar years after the first offering date under the ESPP by the number of shares equal to 1% of the total outstanding shares of our Class A common stock and Class B common stock as of the immediately preceding January 31 (rounded to the nearest whole share) or such lesser number of shares as may be determined by our board of directors in any particular year. The aggregate number of shares issued over the term of our ESPP, subject to stock-splits, recapitalizations or similar events, may not exceed 20,400,000 shares of our Class A common stock.
Stock options
The following table includes a summary of the option activity during the six months ended July 31, 2019:
 
Options Outstanding
 
Weighted-Average Exercise Price
Outstanding at January 31, 2019
12,451,739

 
$
5.72

Granted
600,592

 
38.37

Exercised and awarded
(2,061,679
)
 
4.73

Forfeited or canceled
(246,500
)
 
8.91

Outstanding at July 31, 2019
10,744,152

 
7.66

Exercisable at July 31, 2019
4,944,779

 
4.28



16

Table of Contents
SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Restricted stock units
The following table includes a summary of the RSU activity during the six months ended July 31, 2019:
 
Number of Shares Underlying Outstanding RSUs
 
Weighted-Average Grant-Date Fair Value per RSU
Outstanding at January 31, 2019
845,199

 
$
24.17

Granted
1,993,706

 
40.67

Vested
(116,989
)
 
16.31

Forfeited or canceled
(118,367
)
 
34.11

Outstanding at July 31, 2019
2,603,549

 
36.71


The following table includes a summary of shares available for issuance under our 2018 Plan and our 2018 ESPP during the six months ended July 31, 2019:
 
Shares Available for Issuance
 
2018 Plan
 
2018 ESPP
Balance at January 31, 2019
8,458,343

 
1,719,782

Authorized
5,248,572

 
1,049,714

Granted
(2,594,298
)
 
(172,521
)
Forfeited
364,867

 

Balance at July 31, 2019
11,477,484

 
2,596,975


As of July 31, 2019$4.0 million has been withheld on behalf of employees for a future purchase under the ESPP and is recorded in accrued compensation and related benefits.
Share-based compensation expense
Share-based compensation expense included in the condensed consolidated statements of operations was as follows (in thousands):
 
Three Months Ended July 31,
 
Six Months Ended July 31,
 
2019
 
2018
 
2019
 
2018
Cost of subscription revenue
$
356

 
$
84

 
$
591

 
$
118

Cost of professional services revenue
298

 
150

 
515

 
197

Research and development
3,317

 
1,378

 
5,589

 
2,043

Sales and marketing
3,276

 
1,370

 
5,385

 
1,884

General and administrative
1,839

 
1,116

 
3,303

 
1,698

Total share-based compensation expense
$
9,086

 
$
4,098

 
$
15,383

 
$
5,940


10. Income Taxes
The provision for income taxes for interim tax periods is generally determined using an estimate of the Company’s annual effective tax rate, excluding jurisdictions for which no tax benefit can be recognized due to valuation allowances, and adjusted for discrete tax items in the period. Each quarter the Company updates its estimate of the annual effective tax rate and makes a cumulative adjustment if the estimated annual tax rate has changed.
 The Company’s effective tax rate generally differs from the U.S. federal statutory tax rate primarily due to a valuation allowance related to the Company’s U.S. federal and state deferred tax assets partially offset by the windfall from share-based compensation tax deductions.
The Company recorded a benefit for income taxes of less than $0.1 million and $0.1 million for the three and six months ended July 31, 2019, respectively, primarily attributable to the windfall from share-based compensation tax deductions offset by income taxes in foreign jurisdictions and state income taxes.
The Company recorded a provision for income taxes of $0.1 million for the three and six months ended July 31, 2018, primarily attributable to income taxes in foreign jurisdictions and state income taxes.  

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SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


11. Leases
Leases
The Company has operating leases primarily related to corporate offices and certain equipment, and finance leases primarily related to data center equipment. Our leases have remaining lease terms of less than 1 year to 7 years, some of which include options to extend the leases for up to 5 years.
The components of lease expense recorded in the condensed consolidated statement of operations were as follows (in thousands):
 
Three Months Ended
July 31, 2019
 
Six Months Ended
July 31, 2019
Operating lease cost
$
2,634

 
$
5,365

Finance lease cost:
 
 
 
Amortization of assets
1,025

 
1,997

Interest on lease liabilities
59

 
125

Short-term lease cost
142

 
269

Variable lease cost
432

 
835

Total lease costs
$
4,292

 
$
8,591


Supplemental balance sheet information related to leases was as follows (in thousands):
 
Financial Statement Line Item
 
As of July 31, 2019
Assets:
 
 
 
Operating lease assets
Operating lease right-of-use assets
 
$
49,719

Finance lease assets
Property and equipment, net
 
5,454

Total leased assets
 
 
$
55,173

 
 
 
 
Liabilities:
 
 
 
Current
 
 
 
Operating
Operating lease liabilities, current
 
$
9,530

Finance
Finance lease liabilities, current
 
3,277

Non-current
 
 
 
Operating
Operating lease liabilities, non-current
 
42,964

Finance
Finance lease liabilities, non-current
 
2,295

Total lease liabilities
 
 
$
58,066



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SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Other information related to leases was as follows (dollars in thousands):
 
 
 
Six Months Ended July 31, 2019
Supplemental cash flow information:
 
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
Operating cash flows from operating leases*
 
 
$
4,461

Operating cash flows from finance leases
 
 
118

Financing cash flows from finance leases
 
 
2,042

Right-of-use assets obtained in exchange for lease obligations:
 
 
 
Operating leases
 
 

Finance leases
 
 
1,682

 
 
 
 
Weighted-average remaining lease term (in years):
 
 
 
Operating leases
 
 
6.3

Finance leases
 
 
1.9

 
 
 
 
Weighted-average discount rate:
 
 
 
Operating leases
 
 
6.4
%
Finance leases
 
 
5.3
%
 
 
 
 
*Includes cash paid for lease liability accretion of $1.6 million.
As of July 31, 2019, remaining maturities of lease liabilities were as follows (in thousands):
 
Operating
Leases
 
Finance
Leases
Remainder of fiscal 2020
$
4,927

 
$
2,156

Fiscal 2021
9,783

 
2,408

Fiscal 2022
9,930

 
1,071

Fiscal 2023
10,142

 
263

Fiscal 2024
10,371

 

Thereafter
18,885

 

Total lease payments
$
64,038

 
$
5,898

Less: imputed interest
(11,544
)
 
(326
)
Total
$
52,494

 
$
5,572


As of  July 31, 2019, we had signed leases for additional office space that had not yet commenced. Future noncancelable lease payments associated with these agreements totaled $10.2 million, payable over lease terms of approximately 7 years.
Total rent and related operating expenses recorded under Topic 840, the previous lease standard, were approximately $1.7 million and $3.2 million for the three and six months ended July 31, 2018, respectively.

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SMARTSHEET INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)


12. Commitments and Contingencies
Legal matters
From time to time in the normal course of business, the Company may be subject to various legal matters such as threatened or pending claims or proceedings. We are not currently a party to any material legal proceedings or claims, nor are we aware of any pending or threatened litigation or claims that could have a material adverse effect on our business, operating results, cash flows, or financial condition should such litigation or claim be resolved unfavorably.
13. Geographic Information
Revenue by geographic location is determined by the location of the Company’s customers. The following table sets forth revenue (in thousands) by geographic area:
 
Three Months Ended July 31,
 
Six Months Ended July 31,
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
United States
$
50,884

 
$
31,807

 
$
95,039

 
$
58,946

EMEA
7,323

 
5,289

 
13,572

 
9,772

Asia Pacific
3,408

 
3,131

 
6,233

 
5,949

Americas other than the United States
3,029

 
2,157

 
5,994

 
4,036

Total
$
64,644

 
$
42,384

 
$
120,838

 
$
78,703


No individual country other than the United States contributed more than 10% of total revenue during any of the periods presented.
Property and equipment by geographic location is based on the location of the legal entity that owns the asset. As of July 31, 2019 and January 31, 2019, there was no significant property and equipment owned by the Company outside of the United States.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended January 31, 2019. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including but not limited to those discussed in the section titled “Risk Factors” and in other parts of this Quarterly Report on Form 10-Q. Our fiscal year ends January 31.
Overview
We empower everyone to improve how they work. We are a leading cloud-based platform for work execution, enabling teams and organizations to plan, capture, manage, automate, and report on work at scale, resulting in more efficient processes and better business outcomes. We were founded in 2005 with a vision to build a universal application for work management that does not require coding capabilities.
Unstructured or dynamic work is work that has historically been managed using a combination of email, spreadsheets, whiteboards, phone calls, and in-person meetings to communicate with team members and complete projects and processes. It is frequently changing, often ad-hoc, and highly reactive to new information. Our platform helps manage this kind of unstructured work and serves as a single source of truth across work processes, fostering

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accountability and engagement within tea